Schwarzman's bomb

DavidWeidner

NEW YORK (MarketWatch) -- As his private-equity firm nears the first anniversary of selling a stake to the public, Blackstone Group Inc.'s Stephen Schwarzman is making headlines again.

Fortune's "King of Wall Street" wowed his audience by comparing a deal gone sour to an atomic bomb blast, according to multiple reports. Schwarzman apparently was speaking off script when he addressed investors in Boca Raton, Fla., last week.

"Trying to buy a mortgage bank in the midst of the subprime crisis was the equivalent of being a noodle salesman in Nagasaki when the atomic bomb went off. Not a lot of noodles left or even a person -- and that's what happened to us on this deal," according to accounts of Schwarzman's remarks.

The analogy probably went over pretty well at Blackstone's brand-spanking-new Tokyo office. Say this for little Stephen: He's got some kind of timing.

Steve. Steve. Steve.

With every public gaffe, Schwarzman looks less like a king and more like Wall Street's Marie Antoinette. He is a one-man wrecking crew working against his industry's reputation: from $3 million self-adulatory birthday parties and snobby comments about his butler's squeaky shoes, to his paycheck, to his Howard Hughes penchant for expensive seafood -- eaten cold -- and, now, to his belittlement of human suffering.

Diminishing returns

It is the suffering of Blackstone
BX, -1.48%
shareholders, however, that's really hurting his reputation. Shares, technically called units, are trading below $19 each. That's 40% below Blackstone's initial offering price and 50% below its 52-week high, achieved that first day of trading.

These aren't even the worst of times. Blackstone spent some of March and April scraping around, or below, the $14 mark.

With just a few weeks to go before the first anniversary of the deal, only a big earnings surprise Thursday would be powerful enough to rebuild Blackstone's value.

Most analysts believe that's not going to happen. The quarter's earnings-per-share estimate has fallen to 13 cents from 26 cents two months ago, and that's down from 34 cents three months ago.

Those expectations aren't really as much of a comedown as they may seem. Profit for the last quarter fell 89% from the same period last year. Though Blackstone is doing very well in some areas, such as investment banking, and it will have no problem in paying out its hefty $1.20-a-share dividend, the bottom line is that its business is buying companies using leveraged debt.

The LBO market continues to sputter, and, as a result, Blackstone continues to be exposed as a one-dimensional business. Without the cheap cash of a low-interest-rate environment, Blackstone has trouble moving companies through its portfolio and generating high margins on its management fees, which represented 37% of revenue in 2007.

PHH Corp.
PHH, -0.57%
the company Schwarzman was talking about when he made his A-bomb reference, is a good example. It's a mortgage lender that went belly-up in the midst of its $1.7 billion sale to Blackstone. Had it been done a year earlier, it would have been a layup, but the credit crisis has turned finance buyouts into a walk though a mine field.

Misunderstood mogul

The thing about Schwarzman, although I've never met him, is that people swear he is a genuinely warm and generous person. Schwarzman is almost uniformly described as shrewd, amiable and compassionate. After all, his $100 million donation to the New York Public Library in March is one of the biggest in a civic history full of lavish charitable gifts.

"As you have more resources in life, it's your obligation to deploy those for the benefit of others," Schwarzman told the New York Times.

He also isn't the first on Wall Street to make insensitive remarks. Another buyout baron, Carl Icahn, tells a good joke about Jews and Texans. The difference is that, for some reason, people view Icahn as a crazy old uncle. We expect more sobriety from Schwarzman -- who until recently was a quiet giant in the world of finance.

But we also shouldn't begrudge an individual who went to work on Wall Street, played by the rules and made a fortune. It's what many people aspire to, and there shouldn't be any shame in success. Stephen Schwarzman would hardly be the first person in finance to visibly enjoy the fruits of his prosperity.

The real issue for Schwarzman and his ballyhooed IPO is the stock's legacy. Was it a solid investment in a profitable investment firm or nothing more than a cash-out, paid for by unsuspecting investors, for Blackstone partners?

Schwarzman has been making money for more than two decades. But, after such a lousy year, he needs to prove himself one more time and do the same for his shareholders.

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